Saturday, March 7, 2009

COMMANDING THE HEIGHTS OF THE ECONOMY - BANK NATIONALISATION - NATIONAL SAFETY OR SOVIET COUP, IDES OF MARCH OR FRANKENSTEIN'S MONSTER?

ONE REASON US, UK AND OTHER CAPITALIST DEMOCRACY GOVERNMENTS (AND NOT JUST SHAREHOLDERS, TAXPAYERS, AND BANK CUSTOMERS) FEAR THE NATIONALISATION OF BANKS IS THAT IT OPENS THEM TO POLITICAL ACCUSATIONS OF FAVOURING SOVIET STATE CONTROL, AND IN THE UK LIKE FRANKENSTEIN'S MONSTER THE LABOUR PARTY’S OLD CLAUSE IV HAS RISEN FROM THE GRAVE. Even Julius Caesar feared the same problem!The UK Government now owns about half of UK banking (Northern Rock, Bradford & Bingley, RBS that includes NatWest, LBG that includes HBOS and Birmingham Midshires). New Labour remains very sensitive politically to accusations of outright Socialism. I have to wonder whether Peter Mandelson pushing through with large part privatization of the Royal Mail is politically necessary to remind everyone that this Government and Party are not socialistic nationalisers? But when nationalization happens, for whatever reasons, banking is clearly a most sensitive issue. Banking is not like any other sector. After government itself, banking is the ‘commanding height of the economy’. The same is happening in the USA, what some call ‘nationalisation in all but name’. No-one should under-estimate the political backlash that is possible out of liberal-democratic fear of big government and of socialistIC-STYLE state-control. This is very like the 1930s and 1940s. The political centre favours nationalisation on grounds of clarity, fairness and honesty - if taxpayers effectively own the banks and governments control them then it is only a matter of formally recognizing reality to nationalize! I disagree, not for political reasons, but for financial reasons. Let’s first revisit a bit of history, Clause IV. The original Labour Party Clause IV was drafted by Sidney Webb in November 1917 and adopted by the party in 1918, the year after the Russian Revolution. It read, in part 4: “To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service.” In 1918 nationalisation was seen by many as “modernisation” the very term that Tony Blair used repeatedly to replace Clause IV thinking almost a century later. The Labour Party was the main opposition party in the 1920s, and gained power in 1924, 1929-31, a junior partner in the wartime coalition 1940-1945, and in 1945-51, 1964-70, 1974-79, and 1997 until at least 2010, just under 40 of the last 90 years. In the early years we saw, and not always passionately opposed by other parties, national education, but then the US New Deal, the wartime controls, and after World War II, (in US and UK and variously elsewhere across Europe) strategically important institutions and businesses were nationalised in name or all but in name. Postal services and other monopolies inherited from Royalty were perforce government-owned, also water and sewage, and education became in many countries a largely nationalised service. In the UK, after the war, Labour nationalised health, coal mining, railways, canals, civil aviation, telecommunications, steel, power utilities, embarked on public housing, and the Bank of England. Modernisation and the need to invest taxpayers money were the main reasons, but not the only ones. The 1944 Labour Party policy was that of “public ownership” for curing the ‘evil giants of want, squalor, disease, ignorance and unemployment (idleness)’. Nationalisation was led by Peter Mandelson’s grandfather Herbert Morrison who had experience of uniting London’s buses and underground train system into a centralised system in the 1930s. He started with the Bank of England in 1946, whereupon stockholders received compensation and the governor and deputy governor were both re-appointed. Further industries swiftly followed, civil aviation in 1946, telecommunications in 1947 and creation of the National Coal Board (90% of UK’s energy) in 1947, and in 1948 the establishment of the National Health Service and nationalisation of railways, canals, road haulage (briefly), and electricity. By 1951 the iron, steel and gas industries were also in public ownership and de-colonisation was a kind of permission to nationalise e.g. British India and African dependencies. Britain however also fought wars and disputed nationalisations e.g. over Egypts’s Suez Canal. Most of the world after World War II witnessed nationalisations of major revenue-generating industries, especially oil and gas, and other strategically important utilities. The 1970s saw Labour nationalising some of its oil to create the BNOC. In the 1980s, the Conservative governments reversed much of this with the privatisation of BT (telecommunications), BA and BAe, and energy companies BNOC, CEBG, BG and in the 1990s BR (railways), LT lines and bus services. Public house building stopped and local government sold off most of its housing stock and lease-back financed various utilities and services, private health and education encourages, and collective bargaining powers of trade unions shredded. Semi-private or ‘independent’ agencies blossomed to take over executive responsibilities for public policy. Public Private Partnerships were begun for many public investment projects. Privatisation became an international phenomenon. In France alone nearly 70 state-owned enterprises were privatised. The commanding rationale for all this was predicated on how tight and restricted government finances were said to be (nothing of the unlimited financing now available to banks) and the necessity to “roll back the frontiers of the state”, “smaller government is better government” and inveterate belief that the private sector’s profit mkotive delivers greater financial efficiency than the moral imperatives governing public services, something that seemed to have won the great ideological war with socialism when the Soviet system collapsed after the end of the 1980s. Labour since 1997, has rejected much of its past beliefs, and continued and expanded public-private partnerships (PPP), full and part-privatisations, such as Airports and some sea-ports, British Energy (nuclear), London Transport, not building social housing, toll roads, PPP schools and hospitals, GP services, land, buildings, military maintenance and support, military R&D, and now also part of Royal Mail. One exception was taking RailTrack back under public control. But all of this, in financial terms, is dwarfed by the nationalisation of half of UK domestic banking and some also substantial UK-bank owned foreign banks. Insofar as we can consider the UK banking sector as one, it is now also ‘nationalised’ in name and also all but name. My inimitable friend Gerald Warner writes in The Telegraph, with his usual uncompromising high Tory instinct that can make even George Osborne seem self-doubting and guarded by comparison, by characterising the nationalisation-bailout of banks, “…the biggest bank robbery in British history." He then goes on to say, "...This is the state seizure of a private enterprise such as Aneurin Bevan would never have dreamed of attempting. Just six months ago Lloyds TSB was a successful bank, untainted by the excesses of RBS, HBOS et al. Now it is a nationalised basket case. “ This theme was picked up in the Sundays, predictably enough, by our hungry for scandal-detail, circulation-falling, press, notably by Sunday Times, but others too.This is, of course, precisely the red-baiting, ‘reds under the banks’, accusations that modern social-democratic governments fear, and find most egregious and irritating. Warner twists the knife he hopes he has stabbed Caesar with by aiding Osborne's line of attack, “This is Gordon's doing, pure and simple. This time MacCavity has been caught in flagrante. On September 15 last year, at a drinks party in the City, the Prime Minister buttonholed Sir Victor Blank, chairman of Lloyds TSB, and told him the Government would suspend the competition rules if Lloyds took over HBOS, in return for an understanding that the merged institution would lend to first-time buyers. Later that month, when the takeover momentarily stalled, Brown publicly declared: "We have changed the competition law." Actually, we don't know that for fact. Until now the balance of opinion was that Eric Daniels it was who instigated the 'no reference to the Competition Commission' as a make-or break-precondition he, not Gordon Brown, attached to the takeover bid.Is this not just ya-boo politics, seeking to tar the Prime Minister with the same brush as the bankers as being responsible for the credit crunch and bank failures. When the US Treasury decided not to save Lehman Brothers by granting Barclays Bank guarantees in support of it taking over Lehaman Brothers, but that AIG had to be rescued, the markets were rumour-mongering that HBOS would be the next domino to fail. Everyone was shocked that a big bank that was very interconnected in the credit markets could be allowed to go bankrupt. In hindsight most agree that letting Lehman Brothers go bankrupt was a mistake. There was genuine fear HBOS could suddenly become another Northern Rock, and there were immediate early signs of a bank-run on HBOS. It was necessary for the government to act decisively, and be seen to do so to shore up confidence in UK banks and reassure the public. There was no time to wait. At that moment Daniels had the opportunity to fulfill a long-held ambition to take over HBOS, something Lloyds bank could not have done except in such circumstances where the bigger bank's share price had fallen to only half that of Lloyds (just like as a few years earlier when HBOS offered to buy Lloyds)! Gordon Brown was only doing what seemed sensible and had several US recent precedents, which by the way all seem to have now gone wrong too (at JPM, BoA and Citigroup).To accuse the Prime Minister of wilfully engineering the destruction of Lloyds bank to be able to nationalise it is just crude party-political spin.It would have taken a banking economics genius to anticipate how all banks would eventually succumb to the credit crunch, requiring a recession and credit market collapse of such severity. Warner is not an economics or banking expert, only a conservative pundit, and his view is biased. He is right so far as it goes, however to say, “A 75% state holding in any institution is nationalisation: to pretend otherwise is absurd. Lloyds TSB was a cautious bank, mocked for its conservatism by the banking buccaneers whose testosterone-charged aggression precipitated the downfall of the British financial sector." He may indeed be right also to say, "It was precisely the kind of healthy institution that, left alone, could have led the national recovery." But he is wrong to assume that Lloyds Banks, Victor Blank and Eric Dabiels, were reluctant predators, to claim that "...Gordon Brown, with the anti-Midas touch that characterises him, pushed it into a doomed union with HBOS, thus destroying a bank that gave capitalism credibility.” One reason for this precise attack is of course that it was by being seen to be decisive in September and October that Gordon Brown's popularity rating began to significantly recover. I doubt any of the big banks are sufficiently immmune to survive the credit crunch and recession without becoming crippled, whether Lloyds TSB if it has remained independent, or Barclays, or now HSBC having said it needs capital, as with JPM and BoA, all have their work cut out and none can remain immune. It is interesting to ask if a bank with limited exposure to credit markets that does not by another distressed bank may survive better, and here we will be looking at Standard Chartered and the major Canadian banks. But I suspect all big banks are too globalised and intertwined that eventually all will suffer big losses of capital. Warner relishes re-staging older geopolitical drama, “Though this takeover was effected amid all the gilded trappings of City hospitality, it is as crude and counter-productive as any Marxist confiscation. What an irony that Labour, in its dying days, has effected through incompetence what Bevan, Cripps & Co. could not accomplish from ideological motives. This has been as atrocious a piece of state piracy as any scene in an Eisenstein film with Bolsheviks storming the Winter Palace. The terrifying moral is: there is no limit to the damage that Gordon Brown and his feral Labour Party will inflict on Britain in their death throes.” Gosh, how insulting to Eisenstein never mind Gordon Brown and 'New Labour'. In Eisenstein’s fictionalization of the Winter Palace storming the white guards are shown to be as callous and reprehensible as the public views blame-worthy ex-bankers and any soon to be ex-bankers. The world capitalist system let’s not forget imploded on the 90th or 91st anniversary of the Russian Revolution, give or take a few weeks - or the 80th anniversay of the Wall Street Crash - but does that have any meaning, metaphorical or symbolically, no not at all. This is not marxist nationalisation, but, whether for only a few years or a few years longer than that, perhaps it is about 'modernisation' and about saving capitalism not abandoning it.